BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 2046 (Gomez) - Joint exercise of powers: financing.
Amended: August 4, 2014 Policy Vote: G&F 7-0
Urgency: No Mandate: No
Hearing Date: August 4, 2014
Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 2046 would authorize a joint powers authority
(JPA) to issue bonds and enter into loan agreements for the
financing or refinancing of a private project located outside of
the state under specified conditions, until January 1, 2021.
The bill would also require the Legislative Analyst's Office
(LAO) to submit a report to the Legislature by January 1, 2020
on the issuance of bonds and the financing of projects as a
result of this authority.
Fiscal Impact:
Unknown loss of General Fund revenues to the extent
California taxpayers invest in tax-exempt bonds issued
pursuant to this bill and those taxpayers would not have
otherwise invested in other tax-exempt instruments absent
the bill. Actual losses are unquantifiable, but would
depend on numerous factors, most notably the size and
frequency of multi-state and/or out of state
California-tax-exempt issuances. For illustrative purposes,
there could be a General Fund impact of up to $66,000
annually for every $10 million in bonds issued as a result
of the new authority granted by the bill, based upon
assumptions regarding effective tax rates, a 5% interest
rate, and a 30-year bond.
Unknown costs to the LAO to collect information on bond
issuances and prepare a report to the Legislature. The LAO
staff time and expenses dedicated to these duties would be
highly dependent upon the size and number of bond issuances
and the number and types of projects financed with those
bonds. Staff estimates these costs could be up to $100,000.
These should be characterized as opportunity costs, as the
LAO will not receive additional augmentations to cover these
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costs. (General Fund)
Background: The Joint Exercise of Powers Act allows two or more
public agencies to exercise their common powers by signing joint
powers agreements. Sometimes an agreement creates a joint
powers authority (JPA).
Public agencies use the JPA law and the related Marks-Roos Local
Bond Pooling Act to form bond pools to finance public works,
working capital, insurance needs, and other public benefit
projects. JPAs can issue one large Marks-Roos Act bond and then
loan the capital to local agencies, thus creating a "bond pool."
Bond pooling saves money on interest rates and finance charges.
It also lets smaller local agencies enter the bond market.
The California Constitution exempts interest on bonds issued by
the state, or a local government in the state, from taxes on
income. Federal tax law exempts interest on state and local
bonds as well, but California does not exempt interest on bonds
issued by other states or local governments located in other
states.
Certain types of non-governmental borrowers can take advantage
of tax-exempt financing through "conduit revenue bonds," which
are issued by many types of governmental agencies, including
state financing authorities, chartered cities, counties, joint
powers authorities, redevelopment agencies, and local housing
and industrial development authorities. These bonds may be
issued for various purposes including economic development,
educational and health facilities, and multi-family housing.
The issuing agency loans the funds obtained from the financing
to a non-governmental borrower who builds and operates the
project. A conduit revenue bond is payable solely from the loan
payments received from the non-governmental party, so the
governmental issuer normally has no liability for debt service
on the bonds. A private firm's use of a governmental agency's
authority to issue tax-exempt debt is conditioned on public
benefit being provided by the project that is financed.
A JPA can issue tax-exempt revenue bonds to finance projects
that provide a public benefit and are located within the
geographic boundaries of its member agencies. State law
requires local approval of the construction, acquisition, and
financing of public benefit projects. The local agency with
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approval power must be the city, county, or city and county
within whose boundaries the public benefit project is to be
located; the law also specifies that the local agency with
approval power must have land use jurisdiction over the project
(SB 147, Kopp, 1998; AB 457, Canciamilla, 2001).
Other states, including Wisconsin, Colorado, Florida, Illinois,
Texas, and Arizona, among others, allow public entities formed
under their laws to issue conduit financing bonds for projects
located outside of those states' boundaries. Many of these
multi-state entities have financed projects in California
through the issuance of private activity bonds. The interest
income earned by investors from bonds issued by out-of-state
entities is not exempt from California taxes, but is exempt from
federal taxes and from taxes in the state in which the bonds are
issued.
Proposed Law: AB 2046 would authorize a JPA to issue bonds and
enter into loan agreements for the financing or refinancing of
projects located outside the state, including working capital
for those projects, until January 2, 2021 if all of the
following apply:
The project is owned, developed or operated by a private
entity.
The local agency with land use authority over the
project, or the state in which the project is located
approves the JPA's bond issuance by resolution or other
official action. This approval requirement does not apply
to the issuance of refunding bonds if prior project
financing was approved by the local entity.
The JPA is comprised of at least 25 local agency members
and has issued bonds and entered into loan agreements to
finance at least 25 separate projects.
The JPA finds, based on specified facts and
circumstances, that the issuance of the bonds or financing
of the project will result in a substantial public benefit
to the state because one or more of the following is
satisfied:
o At least 20% of the net proceeds of the
issuance are allocated to financing one or more
projects in the state.
o The borrower of the proceeds has its principal
place of business in California and has paid the lower
of $50,000 in income or franchise taxes, or one-half
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of its total tax liability, in the most recent tax
year.
o The borrower of the bond proceeds or a
controlled group of which it is a member has at least
50 full-time employees in the state.
o The borrower of the bond proceeds or a
controlled group of which it is a member has paid at
least $100,000 in income or franchise taxes to the
state for the most recent tax year.
o The developer of one or more multifamily
rental family projects must have its principal place
of business in California and has paid the lower of
$50,000 in income or franchise taxes, or half of its
total tax liability to all states in the most recent
tax year.
The bill would also require the Legislative Analyst's Office
(LAO) to submit a report to the Legislature by January 1, 2020
on the issuance of bonds and the financing of projects as a
result of this authority, and any recommendations regarding the
modification or extension of the authority. No later than
January 1, 2019, JPAs that issue bonds as a result of the bill
shall provide information concerning those bonds, the projects
financed, the public benefits accruing to the state, and any
other information the LAO deems necessary.
Staff Comments: This bill would allow California JPAs to finance
projects that may be partially or wholly located outside the
state through the issuance of private activity bonds that are
exempt from California income tax. While this authority would
allow California JPAs to compete with out-of-state municipal
authorities for financing projects located both within and
outside California, it is unclear that financing out-of-state
projects with California tax exempt bonds provides a
demonstrable public benefit that justifies the potential loss of
General Fund revenues.
The Franchise Tax Board's annual tax expenditure report notes
that the overall value of state and local bond interest
exclusions for California taxpayers results in an estimated
state General Fund loss of approximately $1.2 billion in the
current fiscal year. Although private activity conduit revenue
bonds only make up a fraction of this amount, this bill would
likely result in an overall increase in tax-exempt bond
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issuances in California, which is likely to increase General
Fund losses. It is impossible to predict the volume of bonds
that will be issued as a result of this bill and which taxpayers
will ultimately purchase those bonds.